Category: Income Inequality Page 4 of 5

On Economic Justice

On February 21, 2013

Who should get how much?

Who deserves how much money?

How do we decide?

It is, I believe, nonsense to say that we deserve whatever we happen to earn. The value of our money is not something which is reliant on us as individuals, but is based instead on the productive capacity of our society, something which individuals have almost nothing to do with. Being born in America or Belgium is worth much more than being born in Nigeria or Bangladesh. You didn’t choose your parents, you didn’t choose your upraising, you can’t be said to “deserve” much if anything as a result.

People whose parents are poor don’t get into university as much as those whose parents are wealthier, nor do they graduate as often. Being lower on the socio-economic stratum reduces performance independent of ability, as the Spirit Level documents. As the joke about George Bush ran, he was born on 3rd base and thought he hit a triple. But the concept applies to so many of us.

Deserve is a very slippery word.

Perhaps we deserve more if we contribute more to society? If this is the case then we can only look at, say, the bankers and brokers of Wall Street, Bay Street and Fleet Street and say “they don’t deserve their money”, because they damaged the world economic system, damage which caused many people to lose their homes, caused food inflation and hunger, and certainly led to many deaths and much suffering which would not have occured otherwise. Financialization of the economy gave them great rewards at great cost to many of their fellow citizens. And it required trillions of dollars to bail them out, and even after they were bailed out, the damage they did was not undone.

Only by the most debased principles can, say, bankers, be said to deserve their money, the same principle that lead Thucydides to write that the strong do as they will, and the weak suffer what they must. The same principles that say anything someone can steal or take, they deserve.

Is that justice? Does that create a society we want to live in? As we have, more and more, come to believe that people deserve to keep whatever they make, however they make it (as evinced by the erosion of progressive taxation), has it made our societies better places to live?

And, to go back to the initial point about the value of money being social and not individual, does it make sense to say an individual “deserves” their money when most of what their money is worth is created by other people?

As I’ve said before, too many jobs today do harm, do evil, rather than good. The health insurance industry in the US makes its money essentially by denying care. Hydrocarbon companies actively stand in the way of stopping climate change. Many food companies produce food which they know leads to diabetes, obesity and chronic disease.

These jobs, these industries, actively decrease the well-being of individuals and of society. They decrease the real value of money, because money which cannot buy well-being is worse than worthless, it is actively harmful.

Who does more harm to society, someone on welfare, or a banker who contributed to the biggest financial crisis since the Great Depression? Who deserves more? I find it hard to say that the banker deserves more than the person on welfare, for he or she has done vastly more harm. Perhaps the banker works harder, but is working harder to do harm so praiseworthy? Is it worthy of reward?

No compassionate society can base distribution of money or goods entirely on contribution to society. If we say that those who don’t contribute deserve nothing, we move quickly into dystopic territory, because someone who receives no goods, dies. If we take the harm principle too seriously, we could easily move into a scenario where we would find the arguments for killing those who do harm overwhelmingly strong. And make no mistake, those in power, private or powerful, can do more harm than almost any garden-variety criminal can. Even a serial killer doesn’t kill as many people as a bad policy can.

Justice recognizes that so much of what we are, so much of what we do, is based on circumstances. Humans are malleable, most people, under the wrong circumstances, will do the wrong thing. Most people, under the right circumstances, will do the right thing, too. That does not mean that we can tolerate too much of the wrong thing, it does not mean we say “oh, they couldn’t help themselves”, it simply means that we put the emphasis on correction, not vengeance; it simply means that we are compassionate, as we would hope others would be compassionate to us.

So we give a good living to those who contribute little, we correct those who do harm, if necessary through criminal sanctions, but better by finding work for them where their talents can do good, not harm. We do not allow major industries which do more harm than good. We recognize that people do change, and someone who is not contributing as much as we might want right now may contribute more in the future.

Knowing that most of the value of money is not individual, that even the most rewarded are rewarded because of the society and times he lives in, we put a cap on rewards.

(Note: There is much more to say about economic justice.)

Sweden v. Canada: Taxation and Inequality

By Ian Welsh

On January 13, 2013

Comments

Ok, so Stephen Gordon in MacLeans feels compelled to weigh in on taxes, to suggest that the Nordic countries just redistribute money from the bottom 99% to each other to maintain equality and so Canada should increase its GST and give money to the poor and middle classes.

It’s true that Nordic countries redistribute a lot more than Canada does, but let’s examine what that means (these #s are slightly wrong as I’m taking them from different, though recent years, but they are within a percent of correct):

The Social Security tax rate in Sweden is about 30%. This is paid by the employer, if not self-employed. This is either a tax on the employee, if one assumes that the employer would have paid the employee this if not taxed), or it is a 30% tax on all labor costs for a corporation, and for most corporations, labor is the largest cost.

Pension insurance costs another 7%. It’s capped, though, but since Gordon is only dealing with the bottom 99% we can ignore that.

The standard VAT rate is 25%.

70% of workers are unionized.

The top tax rate is 57%.

Corporate tax (I’ll use Gordon’s figures) is 26.3%.

Canada: Social Security (Canada or Quebec Pension) is about 10%, between employer and employee contributions. Remember, the combined SS and Pension insurance tax in Sweden is 37% of income.

Harmonized GST, in most provinces runs 10 to 15%. 10 to 15% less than Sweden.

Corporate tax rates, both nominal and effective, are so close there’s no difference (unless, of course, you count that employer paid SS tax, in which case Sweden’s are significantly higher.)

Unionization in Canada is about 31%. Less than half of Sweden’s rate.

Gordon thinks that the best way to deal with income inequality below the top 1% is to increase the GST (because it does less harm to growth than corporate taxes, he claims). Note that the GST (a VAT) is regressive, while SS taxes (if they aren’t capped) are not regressive. So Gordon prefers a regressive tax.

What GST rate would we need to increase to, if we held everything else equal but wanted to to have total taxation, as a percentage, equal to Sweden’s? Canada’s total tax as a percentage of GDP is 32.2%. Sweden 47.9%. Canada would need to bring in approximately 49% more taxes to match Sweden’s rate. VAT taxes made up, as of 2009, approximately 11.5% of Canadian tax income. To use the GST/HST alone to increase taxes to the Swedish rate would require approximately quadrupling the VAT taxes. So, in Ontario, the rate would be about 60%.

That’s not happening.

Gordon’s article only deals with income inequality in the bottom 99%, but he notes that you can’t tax the top 1% to pay for transfers, they don’t actually have enough money. I’ll just note that you don’t tax the richest (really, the top .1%) at massively progressive rates to get money from them, you tax them so they don’t have money to buy up the system, including both politicians and the market. The US is the paradigmatic case of what happens to your political system when you allow the rich to get too rich, but the same process is happening in Canada. (You also don’t allow a few media corporations to own almost all media, for the same reason.)

Finally, let’s just cut the bullshit. High progressive tax rates do not decrease growth. There is no unequivocal empirical evidence that they do. The best growth in the developed world happened in the 50s and 60s, when the developed world had much higher tax rates on both individuals and corporations. Much, much higher rates, as in 90% on top income earners (pdf – pg. 17) in many cases, and corporate tax rates were much higher as well.

Correlation may not be causation, but causation w/o correlation is extraordinarily rare.

Corporations invest and hire more people when they have a reasonable expectation of more demand for their products and services. If there is not enough demand, it does not matter if they have money to spend, they will not spend it. This isn’t even economics, this is business 101. The poorer someone is, the more they consume as a percentage of their income. An affluent middle class, heck a working class that has disposable income, creates more demand than rich people do.

Demand alone is not enough, if there are supply bottlenecks, but the supply bottlenecks we are facing right now are not in money. Corporations have record amounts of money and are not spending it. When individuals, whether corporations or people, won’t spend, it is the government’s JOB to take the money and spend it, and spend it in a way that will get rid of whatever supply bottlenecks exist.

They must also make sure that an actual free market exists and that no one has pricing power. It does no good to redistribute money if all that will happen is that companies with pricing power will just raise prices and take the money away, meaning no real new demand is created, and thus no new jobs and new real economic activity, whatever the nominal numbers show.

On edit: further investigation shows that almost all of the VAT is returned to low income earners. This means the VAT functions as a luxury tax, starting about about the middle middle class. Luxury taxes are on the best taxes, and by luxuries we mean “stuff that’s imported, and especially imported stuff ordinary people can’t afford anyway.”

QE 3

By Ian Welsh

On September 13, 2012

Comments

The Fed has announced its third quantitative easing program. To state what should be obvious, the effect on the economy for ordinary people will be minimal, as with QE1 and 2. It will help banks, financial firms most, other large corporations will also benefit. If you work at the executive level in one of those organizations, it will help you and raise your salary or bonuses. It will not significantly raise demand for goods and services and will not do much for the rest of the economy. Remember, 93% of the gains of the Obama recovery went to the rich, and that was not by mistake.

Some basics on the economy

By Ian Welsh

On September 3, 2012

Comments

1) the majority of new jobs are bad.

2) the economy has still not recovered all lost jobs, either in absolute #s or as a percentage of the population

3) so there are fewer jobs, and what new jobs have been created are worse. They pay worse.

4) The upper middle class job market has recovered, which is why those folks are no longer panicking and are telling you that the economy isn’t so bad as all that.

5) the failure to force the rich to take their losses and to break up the banks means that the same people who caused the 2007/8 financial crisis still control the economy and the government.

6) failure to restructure the economy to get off oil and over to an electrical economy means that the US (and the world) are caught in the oil price dilemna: any real recovery increases oil price and will be derailed by those high oil prices.

7) Europe, ex. Germany, is in recession.

8 ) the developed world is in depression, it never left depression. During depressions there are recoveries (such as they are) and recessions, but the overall economy is in depression.

9) China’s economy is slowing down. Since China is the main engine of the world economy, followed by the US, this is really bad. If it goes into an actual recession, bend over and kiss your butt goodbye.

10) Austerity is a means by which the rich can buy up assets which are not normally on the market for cheap.

11) the wealth of the rich and major corporations has recovered and in many countries exceeded its prior highs. They are doing fine. Austerity is not hurting them. They control your politicians. The depression will not end until it is in their interest for it to do so, or their wealth and power is broken.

12) The US play is as follows: frack. Frack some more. Frack even more. They are trying the Reagan play, temporize while new supplies of hydrocarbons come on line. Their bet is that they’ll get another boom out of that. If they’re right, it’ll be a lousy boom. If they’re wrong (and the Saudis think they are, and the Saudis have been eating their lunch since 2001) then you won’t even get that. Either way, though, they’ll devastate the environment, by which I mean the water you drink and grow crops with.

13) For people earning less than about 80K, the economy never really recovered.

14) If you’re out of work more than 2 months your odds of getting another job drop through the floor. If you do get one, odds are it will pay much less than your previous job.

15) Canada is undergoing austerity madness at all levels of government, and the corporations, with historically low tax rates, are not going to spend either. With Chinese demand for commodities dropping, expect a nasty recession.

16) Australia, having tied itself completely to China is about to reap the downside of that decision.

17) Wages are being systematically broken in the developed world. The rich do not believe they need you, except as wage-slave labor. You will all be company store slaves, paying rental streams to everyone to be allowed to continued to eke out a miserable existence.

18) Since the US sells protected works (so called “intellectual property”) you will continue to see a massive attempt to break anyone who doesn’t pay IP rent to the US. Some countries (Sweden, Germany, among others) are going along. But there are signs of rebellion. Apple may have won against Samsung in their ridiculous attempt to enforce patents on obvious solutions, but both Japanese and Korean courts threw the cases out. Paying rent to America, the hegemon, when the world system is working is one thing, paying rent when the world isn’t working is another.

19) Stirling Newberry says, and I agree, that none of this is stable, but it will last as long as the majority of the baby boom, the silents and a good chunk of the Xers still think they can hang on to their little piece of the pie, and screw everyone else. It will most likely break down in 2020/24, which is when the demographics turn. Young people today are completely screwed, they have astronomical student loans, no or shitty jobs, can’t afford a house and can’t afford to start a family. Note that the places where revolutions, peaceful or otherwise, are happening, are places where the majority of the population is young. Latin America, the Middle East.

Addendum

20) The economic numbers you hear don’t mean squat. Headline inflation does not matter, ask yourself instead “what are my fixed expenses?” Start with food. Jobless claims #s cannot be compared to prior numbers because less people have the sorts of jobs that let you make those claims. For the #s to make sense you’d have to adjust them for the reduced # of jobs which allow claims. The unemployment rate has dropped even though there are, in absolute terms, less jobs, because people have given up looking.

21) The money the Fed floods into the financial markets (quantitative easing, among others) is mostly NOT getting to ordinary people, and whatever Bernanke and his apologists say, it was never intended to. It is intended to prop up financial actors, and keep the rich richer. It has done what it is supposed to do.

Greek election consequences and the shape of the developed world’s future

By Ian Welsh

On June 17, 2012

Comments

will be more years of austerity, people winding up on the street, suicides and outright starvation. In this fertile ground, the neo-nazi right will rise. The left will most likely not compete, because they will refuse to create an enforcer class to protect their own people. The police in Greece voted about 50% for the Golden Dawn, they will not protect the left, either, but will enable the rise of the Golden Dawn.

Under these circumstances a coup of some variety, whether military or otherwise (remember, Hitler never won a majority) is very likely to occur. By blocking the rise of the left so that Greece can be looted, the oligarchs have created their own doom.

In general terms, we are in a pre-revolutionary period. The supreme court coup in Egypt, the outright refusal to obey even the letter of the law let alone the spirit in the case of Wikileaks and Assange, the reign of Obama, are teaching an entire generation that you cannot fix the system from within, through the mechanisms of the old system or through even semi-peaceful protest. The Pacific free trade deal will enshrine even more draconian IP laws and will extend NAFTA style takings regulations which give multinational companies sovereignty over governments.

This will not stand. There will be global war, and there will be global revolution. We are on track for it. The question is when and how. I would guess in less than 20 years the world will fully convulse. Many of the current generation of oligarchs will be dead by then and will win the death bet, but their heirs will reap the whirlwind. As for the population, I expect a billion deaths or so over the next 25 years from famine, disease, war and environmental issues.

Both populations and the oligarchs have refused, over and over again, to do what is necessary to peacefully restructure the world economy, but instead have opted to kick the can down the road. Each kicking of the can has led to more corrupt and sclerotic economics and politics.

In the period between now and the revolution, some nations will take control of their own destinies. Offered a choice between austerity in the international system and nationalism, they will choose nationalism. It will not be as comfortable as being a member of the old international order from before the financial collapse, but that is not being offered. A few nations will be able to work wedges to stay in the system and not suffer too much (Germany, France). But most developed world nations will continue to suffer real declines in their standard of living, driven by inequality and the resource trap which we refuse to restructure out of. The electrical economy wants to happen, but it will not happen on a wide scale until after war and revolution. Such is the choice both our elites and the regular population continue to make.

Tax Cuts for the rich create jobs outside the US

By Ian Welsh

On September 19, 2010

Comments

The standard right wing talking point that tax cuts for the rich and for corporations create jobs is true: Tax cuts for the rich create jobs overseas.

The tax cuts’ two bills, in 2001 and 2003 – changed laws so that personal income tax rates were reduced, exemptions for the Alternative Minimum Tax increased, and dividend and capital gains taxes also cut.

Yet in the debate, it seems of no moment to either side whether the tax cuts were effective in achieving their goal of spurring business investment and making the US economy more competitive.

Our own examination of US non-residential investment indicates that the reduction in capital gains tax rates failed to spur US business investment and failed to improve US economic competitiveness.

The 2000s – that is, the period immediately following the Bush tax cuts – were the weakest decade in US postwar history for real non-residential capital investment.

Not only were the 2000s by far the weakest period, but the tax cuts did not even curtail the secular slowdown in the growth of business structures.

Rather, the slowdown accelerated into a full decline.

The logic of this is simple enough. If you have money to invest, you’re going to invest it where it’ll return the most. Right now and in the past couple decades that is either in leveraged financial games, or it is in economies which are growing fast and have low costs. The US does not have high growth compared to China or Brazil or many other developing countries. It has high costs compared to those countries as well.

If you can build a factory overseas which produces the same goods for less, meaning more profit for you, why would you build it in the US?

Until that question is adequately answered, by which I mean “until it’s worth investing in the US”, most of the discretionary money of the rich will either go into useless speculative activities like the housing and credit bubbles, which don’t create real growth in the US, or they will go overseas.

There are a number of ways this question can be answered.

You could slap taxes on foreign capital flows;
you could slap tariffs on foreign goods produced in low cost domiciles so that companies have to produce in the US to have access to the US market;
you could push industries which are hard to outsource but don’t actually decrease American competitiveness. The housing bubble increased the cost of doing real business in the US by inflating real estate costs. A massive buildout making every building in the US energy neutral or an energy producer would increase US competitiveness.
you could try and do what America once did: have a tech boom. If the future is being produced in a country then everyone has to invest there and when things are changing fast you can’t offshore production, because speed matters and offshoring is slow. This is why real wages increased during the tech boom of the 90s.

There are other answers as well, but the point is simpler: you must answer the question “why invest in the US instead of a low cost, high growth country?” Until you answer that question tax cuts will not only not do any good, but in a sense will do harm, by increasing the speed at which jobs are offshored out of America.

Being Poor

By Ian Welsh

On April 28, 2010

Comments

Bloody depressing, if you’ve ever been poor, but worth reading–especially take some time to read the comments. Don’t put on country music or the Blues at the same time, I don’t want to be responsible for you slitting your wrists.

I will add that much of this is entirely unnecessary.

Krugman is trivially right and essentially wrong

By Ian Welsh

On April 15, 2010

Comments

When he says:

In fact, we know what a system in which banks are allowed to fail looks like: that’s how the US banking system worked before the creation of the Fed. And you know what? It wasn’t a smoothly functioning system, with sound banking enforced by market discipline; it was a system periodically wracked by “panics” that destroyed peoples’ savings and plunged the economy into recession.

Finally, because that’s what really happens when banks are allowed to fail freely, promises not to bail out banks in the future aren’t credible. Fail to reform finance now, and there will be two, three, many TARPs in our future.

Again, small banks have been allowed to fail. Today. In large numbers. So it is credible that small banks will be allowed to fail in the future. It’s not the only thing which has to be done, but it is a necessary step.

The idea is that if every bank is small, no bank knows it specifically is “too big to fail”, and no bank thinks that it might not be one of the banks allowed to fail.

Finance is not going to be reformed enough, in any case. You know it, I know it, Krugman knows it.

TARP is a distraction. It wasn’t necessary. What happened, that mattered, was done mostly by the Fed with Treasury’s collusion, but that 700 billion was never needed, since the Fed can pull money out of its bum (and did.)

This is misleading:

Now, in 2008-2009 the shareholders were not cleaned out, and the bondholders left untouched; in part this was a policy decision, but it was also influenced by the lack of “resolution authority”: there was no clean, well-established route for seizing complex financial institutions. We can fix that, and deal with future Citigroups (one of which, given history, is likely to be … Citigroup) the way the FDIC deals with smaller banks: protect the depositors, clean out the shareholders.

This was entirely a policy decision. While, no, the FDIC hadn’t closed down anything as big as Citigroup before (because before Glass-Steagall was repealed it was illegal to be as large as Citigroup), it had all the authority it needed and could have taken over Citigroup any time it wanted to.

This is a Bush response. “I fucked up and didn’t do the right thing, so I need more authority, even though I had all the necessary authority.”

Granted, better regulation is needed, but the parts of regulation which failed were prior to the financial collapse. The necessary authority to wipe out shareholders was in place. That was a policy decisions—a political decision. Neither Bush nor Obama was willing to greenlight the FDIC to do its damn job.

This is perhaps the stupidest disagreement I’ve seen in some time: no one who thinks breaking up banks is necessary thinks it is sufficient. Why is Krugman acting as if they do? Why does he want to protect large banks from breakup? Why are we even talking about this?